Deep Value

Carlisle, founder of Eyquem Investment Management, a former analyst at an activist hedge fund and an M&A lawyer before that, is known to value investors for the Greenbackd blog and for Quantitative Value, which he wrote with Wesley Gray. Deep Value combines market history with backtests, pairing stories of raiders and activists with the academic research that explains why their campaigns worked.

The central claim is that investors are paid for finding mispricing, not for picking winners. Carlisle tests Joel Greenblatt's Magic Formula, which ranks stocks on both cheapness and return on capital, against a plain enterprise-multiple screen he calls the acquirer's multiple, and argues that the quality factor adds less than investors expect, because high returns on capital tend to mean-revert. He draws on Werner De Bondt and Richard Thaler, among others, to show that glamour stocks disappoint and losers rebound.

The writing is dense and footnoted, closer to a long research memo than to a popular book, and the backtests come from the author rather than independent replication.

It suits analysts and portfolio managers who want the evidence behind value and activist strategies. Carlisle later condensed the argument into the shorter The Acquirer's Multiple (2017).

1. You are paid for mispricing, not for quality. Carlisle's tests suggest that a cheap price relative to enterprise value does most of the work, and that adding a high return on capital screen adds less than expected.
2. Mean reversion is the engine. Unusually high and low profitability, growth and returns tend to fade, so the market's extrapolation of recent results creates the opportunity.
3. Enterprise multiples beat price-to-earnings. Measuring a company as an acquirer would, on enterprise value to operating earnings, accounts for cash and debt and finds targets that P/E screens miss.
4. Activists supply the catalyst. Icahn's Tappan campaign shows the playbook: buy a large stake in an undervalued company, publicize the discount, and push for a sale, buyback or liquidation.
5. Lazy balance sheets are signals. Excess cash, low payout ratios and stock below book value mark companies where a change in capital allocation could release value, which is what activists look for.

The book has ten chapters that move from history to evidence to practice.

1. Raiders and their roots (Chapters 1-2). Opens with the Icahn Manifesto of 1976 and Icahn's campaign at Tappan Stove, which ended in a sale to Electrolux, then goes back to Graham's net current asset value and the proto-activism of Security Analysis.
2. Buffett's shift (Chapter 3). Follows Warren Buffett from Graham-style liquidator to Charlie Munger's idea of buying wonderful companies, through American Express, See's Candies and Berkshire Hathaway.
3. What the data say (Chapters 4-5). Tests the Magic Formula against the acquirer's multiple and examines the academic research on mean reversion in earnings, returns and markets.
4. Glamour and contrarians (Chapters 6-7). Uses Litton Industries and the conglomerate boom to show how glamour stocks get overpriced, then the career of New Zealand investor Ronald Brierley and studies of 'excellent' versus 'unexcellent' companies to show why buying falling knives pays.
5. The corporate raid (Chapters 8-9). T. Boone Pickens and Mesa Petroleum, Jensen's case for takeovers as a check on wasteful managers, Icahn's fight with Genzyme, and research on the returns from hedge fund activism.
6. Applied deep value (Chapter 10). Screens for undervaluation, large cash holdings and low payouts, with recent campaigns by Third Point and by Greenlight Capital at Apple as case studies.

The economic climate is ripe for another golden age of shareholder activism Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations is a must-read exploration of deep value investment strategy, describing the evolution of the theories of valuation and shareholder activism from Graham to Icahn and beyond. The book combines engaging anecdotes with industry research to illustrate the principles and methods of this complex strategy, and explains the reasoning behind seemingly incomprehensible activist maneuvers. Written by an active value investor, Deep Value provides an insider's perspective on shareholder activist strategies in a format accessible to both professional investors and laypeople. The Deep Value investment philosophy as described by Graham initially identified targets by their discount to liquidation value. This approach was extremely effective, but those opportunities are few and far between in the modern market, forcing activists to adapt. Current activists assess value from a much broader palate, and exploit a much wider range of tools to achieve their goals. Deep Value enumerates and expands upon the resources and strategies available to value investors today, and describes how the economic climate is allowing value investing to re-emerge. Topics include: Target identification, and determining the most advantageous ends Strategies and tactics of effective activism Unseating management and fomenting change Eyeing conditions for the next M&A boom Activist hedge funds have been quiet since the early 2000s, but economic conditions, shareholder sentiment, and available opportunities are creating a fertile environment for another golden age of activism. Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations provides the in-depth information investors need to get up to speed before getting left behind.